Monday, February 28, 2005

China vs. India

Martin Wolf has a Financial Times column comparing the two Asian giants. It's worth a read.

He concludes that China will overgrow India because while both are the heirs of great civilizations ... China's civilization is inseparable from its state, while India's is inseparable from its social structure, above all from the role of caste.

This difference permeates the two countries' histories and contemporary performance. As Lord Desai of the London School of Economics has noted, "for India, the problem [is] achieving unity in diversity". China, however, is a "unitary hard state, which can pursue a single goal with determination and mobilise maximal resources in its achievement".

There are reasons why Mr. Wolf's prediction might indeed come true, but this one rings real hollow. If "unity in diversity" were such a growth-abater, surely EU would not have found many believers -- including Mr. Wolf. The entire capitalist premise is based on diverse ideas competing ferociously -- leading to new insights and innovations which defy and change history. For this to happen. socio-political-economic structures that accommodate and value diversity are essential. India has many ills, but on this front it has done extremely well.

Chinese state, in contrast, does not value diversity -- in fact, it crushes it. To the extent Chinese civilization is inseparable from its state, as Mr. Wolf avers, well then, it is hardly a civilization to gush over. Further, if the capitalist idea is valid -- we certainly believe it is as, no doubt, Mr. Wolf does too -- then, sooner or later, the Chinese edifice will come down crashing.

A key component of the Beijing's path to wealth has its banks gathering Chinese (very high) Yuan savings to buy US Dollars. Since the Chinese autocracy maintains the Yuan artificially too cheap (and thus the Dollar artificially too expensive), buying Dollars with Yuan seems counter-intuitive. Afterall, no one in history ever got rich buying assets at prices they know are artificially inflated!! When the currencies finally find their natural levels, Chinese banks would then hold Dollar assets worth much less than they paid for them, and Yuan liabilities much higher than these devalued assets can cover. This is when the fun will start.

What's really happening is that China is transferring its Yuan wealth to American consumers. We're OK with this since, as US residents, this keeps our inflation and credit card costs low!! How this is good for Chinese people, however, defies our understanding.

Also, read Rand's Charles Wolf on why China's problems are perhaps even more complex than India's.

No comments: